I was right about software this morning and made nothing on it.
Not one dollar, because I never got the trade on.
Salesforce down 4%, SAP down 2, Microsoft getting whacked, the whole complex coming apart while the semiconductors ripped. Everything I want to see, I’m seeing. Thesis correct, setup correct, and timing on point.
And I sat there and did absolutely nothing, because by the time I wanted the trade the price to get it was already gone.
Why you can’t get bearish on a down day
You’re eloquently pissing into the wind, and I mean that as a technical description.
When this market is already selling off and you go buy yourself a bearish position, you are paying for a move that partly happened, at a premium somebody already marked up, into a volatility environment that got more expensive while you were sitting there deciding.
S&Ps down half a percent, Microsoft down 1.6%
Now go price a put spread in Microsoft on that tape and tell me you like the fill. You don’t, and nobody does.
The guy on the other side has been staring at the identical candles you have, and he is not about to hand you cheap downside while the thing is falling apart in front of him.
And what gets me is that you’ll get filled anyway, which is the trap.
You can absolutely put the trade on, and then you’ve paid so much that this market has to keep running considerably lower before you’re anywhere near breakeven. Congratulations, you bought yourself a hope with a commission attached to it.
So when were you supposed to do it
Couple of days ago.
I already know the objection, because I’ve heard it a thousand times and I’ll hear it a thousand more.
It wasn’t selling off a couple of days ago, Don. Why would I buy a bearish trade in a stock that’s going up?
Because that’s exactly when they’re cheap.
Nobody wants downside when the thing is rallying. Premium’s low, vol’s low, and the market maker is thrilled to sell it to you because he doesn’t believe he’ll ever have to pay on it. Your window is wide open precisely when you don’t feel like walking through it.
By the time it feels obvious you’re the last one through the door and you’re paying door prices.
Ripe for the plucking, and you weren’t there.
So what now
You wait for the bid to come back under it.
Sounds passive and it isn’t. You’ve got the thesis, you’re just missing an entry, and the entry shows up when the thing you want to short catches a bounce and everybody exhales and the premium comes back to something a human being would pay.
Might be tomorrow, might be next week. It might not happen at all and you never get the trade, and that is a perfectly acceptable outcome that nobody wants to hear.
What’s not acceptable is chasing it here because you’re irritated you missed it.
I’m irritated I missed it, and I said so out loud this morning. I would like to be short Microsoft or Salesforce right now and I’m not, and the only reason is that I’d have to pay a number I don’t want to pay.
So I sit and I watch. If it bounces I get involved, and if it doesn’t there’ll be another one next week.
There always is.
I went a lot deeper on premium and timing and how to think about entries in an ebook I put together.
To your success,
Don Kaufman
